Tyco paid CFO millions amid probe

NEW YORK TIMES NEWS SERVICETHE BALTIMORE SUN

NEW YORK - Tyco International Ltd. agreed to pay a severance package of $44.8 million in cash to Mark H. Swartz, its chief financial officer, while he was under investigation by a grand jury in Manhattan that later indicted him on fraud charges.

A copy of the Aug. 1 agreement was obtained yesterday from a person close to the investigation of Swartz and L. Dennis Kozlowski, Tyco's former chief executive. It was approved Aug. 14 by two board members serving on Tyco's compensation committee.

The amount paid to Swartz was not disclosed to shareholders, though the complex formula that Tyco used to devise his exit agreement was outlined in a document attached to its most recent quarterly filing.

The agreement was reached the day Swartz resigned from Tyco at the behest of new Chief Executive Officer Edward D. Breen, who was brought in to run the company after Kozlowski was indicted by the Manhattan grand jury on tax evasion charges in June.

Those charges were expanded Sept. 12 when Robert M. Morgenthau, the Manhattan district attorney, announced indictments against Kozlowski and Swartz, arguing that they had reaped $600 million through racketeering that involved stock fraud, unauthorized bonuses and loans.

The disclosure of such a generous exit package for an executive who Tyco knew was under criminal investigation is expected to raise questions among shareholders, who bid up the stock yesterday after Breen outlined his plan to restore investor confidence.

At the time of the Swartz deal, Tyco was reeling from the initial indictment of Kozlowski and had acknowledged needing to work hard to repair its image among investors as a company with a complacent board.

The details of the payment are likely to be another unwelcome surprise for Tyco shareholders disturbed by the revelation of one hidden scandal after another.

'Highly questionable'

"To make a cash settlement of $44 million plus stock to somebody known to be under criminal investigation is highly questionable," Morgenthau said. "It is also inconsistent with what the company did with Kozlowski. They are not paying him anything. Kozlowski and Swartz were two-to-one partners on all deals, so why is Swartz being treated differently?"

He was referring to the routine arrangement at Tyco in which Kozlowski got bonuses or other remuneration twice as large as Swartz's.

A spokesman for Tyco said Swartz was treated differently from Kozlowski because he had been more cooperative in the internal inquiry than had Kozlowski and because Swartz played a significant role helping the company sell shares in its financing subsidiary, CIT, to the public June 2.

Under the agreement, Swartz received $10.4 million from a deferred-compensation plan, $24.5 million from an executive life insurance plan, nearly $9.1 million in a lump sum that amounted to three times the combined value of his then-current salary and his highest proxy bonus, plus $756,250 from a consulting agreement.

The agreement also allowed Swartz to receive 702,533 shares of Tyco stock, worth $9 million on the date of the deal, and $2.03 million in unvested stock options. Beyond that, he got six years of medical and dental benefits, and payments to cover his state and local income taxes.

Under the terms of Swartz's package, Tyco is not permitted to sue him for return of the money. Instead, it requires Swartz and Tyco to resolve any disputes over the package through arbitration. Tyco said it plans to bring an arbitration proceeding against Swartz.

The breakdown of the $44.8 million the company agreed to pay to Swartz was not disclosed by Tyco in its quarterly filing submitted to the Securities and Exchange Commission on Aug. 9. Nor were the details made public in the report issued last week as part of a so-called 8-K filing with the SEC by the law firm Boies, Schiller & Flexner. The firm was hired to conduct an internal investigation into the practices of Tyco executives.

Walter Montgomery, a spokesman for Tyco, said, "The 8-K focused on who did what improperly, when and with what effect. It did not focus on negotiations with individuals." The company thinks it fulfilled its reporting requirements by including a copy of Swartz's severance agreement in the quarterly filing Aug. 9, he said.

"We paid over money due to him under various agreements including a deferred-compensation agreement," Montgomery said. "We paid only approximately one-third of what he was entitled to under existing agreements with the company. And we reserve the right to go after that one-third."

Signatures of Stephen W. Foss and W. Peter Slusser, members of the compensation committee, appear on the Aug. 14 agreement approving the details of Swartz's severance. Paul Verkyil, a lawyer at Boies, Schiller, signed the agreement as a representative for Tyco.

Securities lawyers said approval of the severance package by Foss and Slusser might give the SEC room to expand the civil suit it filed against Kozlowski, Swartz and Mark Belnick, the company's chief counsel, on Sept. 12 by including the two board members.

Possible defense

The approval by the directors also might give Swartz a defense against some of the SEC's arguments that the case involved "egregious, self-serving and clandestine misconduct."

Phone calls to Foss and Slusser were not returned. Charles Stillman, the lawyer representing Swartz, declined to comment.

Also yesterday, Breen said in his first conference call with investors that the company expects earnings of 30 cents to 33 cents a share for the quarter that ends this month instead of the 45 cents to 47 cents it estimated in July.

Separately, New Hampshire regulators sent a letter to Breen late yesterday insisting on the immediate resignations of the nine board members who served under Kozlowski when he was CEO.

"It is disingenuous to believe that the same board that breached its fiduciary duties in exercising oversight responsibility over certain wayward employees is the best arbiter of appropriate corporate governance," wrote Mark Connolly, the state's director of securities regulation.

Connolly said his office does not have the power to compel the nine board members to resign but can bring civil charges and hold a public hearing. He declined to say whether that is his intent.